When to break the golden rules of finance

Some financial experts will tell you to make financial rules and stick to them; others suggest you should be flexible and adapt your financial plan as you go along. So what’s a girl to do? Well, as with many things in life, the answer may fall somewhere in the middle. Because while you need financial rules to lay some guidelines and keep your behaviour in line, if you tow that line at all costs, your financial plan is likely to go off the rails when you run into uncharted territory.

Check out some of the golden rules of finance and investing – and when you should break them.

Expert advice suggests that if you have debt, such as student loans, a big credit card balance, a car loan or a line of credit, you should throw all your efforts at paying it down fast – at the expense of everything else. It’s not bad advice. Many consumer debts carry high interest rates. On a credit card, for example, this interest is usually compounded daily (no wonder that bill grows so fast!), so the longer it takes you to pay off the debt, the larger it grows.

When to break it: Paying off debt, especially high-interest credit card debt, should definitely be a priority, but not at the cost of setting money aside. After all, what’s most important when it comes to getting out of debt is staying out. If you don’t have some money set aside for emergencies, where will you turn when your car grinds to a halt on the way to work? Visa? MasterCard? Exactly.

The “10 percent rule” may be one of the oldest financial rules, as it’s believed to be derived from ancient times, when religious followers were conscribed to pay 10 percent tithes to their church or community. Fast forward 1000 years or so: setting aside a portion of your income is still a crucial habit that can significantly affect your financial health over the long term.

When to break it: This is one old rule that could use a new spin. Here’s why: If you’re single, childless and making a good income, you should be aiming to save more than 10 percent of your income – probably a lot more. But for those who are starting a family, paying off debt, or facing other financial difficulties, this can be a tough mark to hit. That doesn’t mean you shouldn’t try, but don’t let that number discourage you. Do better than 10 percent whenever you can. When you can’t, do your best and avoid beating yourself up about it.

This is an axiom the investment industry loves, particularly when it comes to mutual funds, which charge an expense ratio to investors - whether their investments grow or not. This common mantra is also good advice in the sense that it keeps investors from driving up trading fees in an effort to time the market, which can really put a drag on returns. Plus, it’s what Warren Buffett lives by, and he’s one of the world’s richest and most successful long-term investors.

When to break it: Warren Buffett buys and holds, but what he doesn’t do is buy losers. In fact, one of his biggest skills is being able to research and choose which stocks are going to be winners over the long term (that’s why he’s often called the “Oracle of Omaha” – and why he’s a billionaire). If you are holding a losing stock in your portfolio – and by that we mean not only a stock whose price is sliding, but one for which future prospects look grim – it won’t get any better with age. Do everything you can to find stocks that you can hold for the long term; if you find you’ve made a bad choice, dump it.

The notion that being young affords the thrill of living on the edge and taking big risks pervades investing too. There’s an old axiom in investing called the risk-reward ratio, which states that investors who take big risks on new technologies, start-up companies and other ventures that have a high possibility of failure will also be rewarded more handsomely if those high-risk ventures succeed. Investment thrill seekers should let loose when they are young. If you’re lucky, you’ll hit on a big return, setting your portfolio up for the future. If you lose big, you have time to rebuild that lost equity.

When to break it: A risky portfolio really only wins out over a lower risk one if it’s well chosen. If you don’t know much about investing and are unwilling to take the time to learn, making high-risk stock picks is little more than gambling. Plus, risk isn’t for everyone; some people just can’t stomach seeing their portfolios drop when a company misses earnings. If adding some risky investments to your portfolio leaves you biting your nails to the quick, it likely isn’t worth the extra potential return.

This is more of an assumption than a rule, and it often happens naturally to those who find their way into a good career. After all, as you gain experience and get the opportunity to show your employer what you’re made of, you’re likely to be rewarded with promotions, raises and perhaps bonuses (woohoo!) over time.

When to break it: Career trajectories are seldom a steady ascent. Be open to the possibility of earning less, especially if that lower income comes with less stress, better job satisfaction or the opportunity to start a new business or jump on a new career path. If you get stuck on the notion that your income can only go up, you might miss out on bigger opportunities, both personally and monetarily.

The ultimate golden rule

Sometimes rules are made to be broken. That doesn’t mean you shouldn’t make them, but don’t be so rigid that you can’t turn back when they no longer meet your needs. The most important rule in finance is to think, not follow. If you stick to that one, girl, you’ll be golden.

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